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JPMorgan Chase (NYSE: JPM) Earnings: Looking for a Silver Lining

By Chad Fraser on January 17, 2012

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JPMorgan Chase (NYSE: JPM) kicked off a week of financial-sector earnings reports on Friday.

Investors, of course, are watching closely, trying to get a sense of how the financial sector is faring as it continues to be buffeted by the Eurozone crisis and weak growth in the U.S.

Here’s how the latest numbers from JPMorgan Chase looked:

In the fourth quarter, revenue at America’s biggest bank fell 17%, to $22.2 billion from $26.7 billion a year ago. Profits slumped 23%, to $3.7 billion, or $0.90 a share, from $4.5 billion, or $1.12 a share. The latest earnings matched the Street’s expectations, but revenue fell short of the $23 billion that analysts were looking for.

JPMorgan’s investment banking business saw its profits drop 52% from a year ago. As well, other items, like the $528 million that JPMorgan Chase put aside to defend itself against ongoing mortgage-related lawsuits (more on that below), further weighed on its profits.

On the bright side, more of JPMorgan Chase’s clients are paying back their loans on time. Across the company, loan-loss provisions fell to $2.18 billion in the fourth quarter from $3.04 billion a year ago and $2.41 billion in the third quarter. Business loan demand also improved.

JPMorgan Chase CEO Jamie Dimon stressed these points in his remarks:

“As the economy continues to recover, we are gratified to see signs of improvement in loan demand and credit quality. Commercial Banking had its sixth consecutive quarter of loan growth, including a 17% increase in middle-market loans over the prior year. In Treasury & Securities Services, trade loans were up 73% over the prior year. Business Banking loans were up 5% over the prior year.”

Analysts See Further Headwinds for JPMorgan Chase, but Stock Remains “Trustworthy”

Many analysts shared Dimon’s optimism over the improved business loan demand. However, Ben Protess and Peter Eavis, writing in the New York Times, pointed out that there’s still trouble on the consumer side, including a 7% drop in student loans and a 2% decline in car loans.

It’s not because the bank is unwilling to lend, according to Jason Goldberg, a senior analyst with Barclays: “The consumer is still deleveraging,” he says, “It’s not a lack of supply; it’s a lack of demand.”

Zacks.com also acknowledged the headwinds the company faces, but was confident JPMorgan Chase would be able to overcome them:

“Among the fundamental challenges, JPMorgan has been fighting with are poor capital market revenues, weak loan demand, low liquidity and a tough regulatory environment. But we do not have an inkling of doubt on the trustworthiness of the stock, given the company’s past consistency in earnings performance and high dividend-yielding nature.”

Its recommendation: “An investor with the appetite to absorb risks related to market volatility should not be disappointed with an investment in JPMorgan over the long haul.”

“Opaque” Factors Make it Tough to See What’s Ahead for JPMorgan Chase

Charles Smith, CIO of Fort Pitt Capital, was concerned about unpredictable factors, like the foreclosure-related lawsuits the bank is dealing with, and how they would “muddy the waters” in terms of forecasting future performance:

“There are going to be continuing significant—$1 billion, $1.2 billion, $1.5 billion—sort of recurring non-recurring items for the next year or so, at least. So there is going to be a continued opaque nature to these earnings reports.”

Phil Orlando, chief equity strategist at Federated Investors, was perhaps the most pessimistic about what JPMorgan’s earnings say about the wider problems in the financial sector. Quoted in an article on washingtonpost.com, he said: “JPMorgan is the gold standard. So what happens to the banks that aren’t quite as strong and aren’t quite as well-managed?”

At trading desks, he said, it’s called the cockroach theory: “You never see just one cockroach. If you see one, you know there’s bound to be a lot more.”

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